Question

Appliance Center sells household appliances, including Balthrop's new dishwasher. Appliance Center offers customers a two-year extended warranty on these dishwashers at the time of purchase for an additional charge of $60. Appliance Center sells 30 of these extended warranties in December 2014. During 2016, Appliance Center incurred $360 in costs to satisfy warranty claims associated with these extended warranty contracts.

a. Record sale of extended warranty.
b. Record recognize revenue in 2015.
c. Record warranty costs in 2016.

Answer 1

The journal entries for recording the sale of extended warranty, revenue recognition, and warranty costs.

Step-by-step explanation:

a. Record sale of extended warranty:

Appliance Center will record the sale of the extended warranty as an increase in revenue and a corresponding increase in liability. The journal entry to record this transaction would be:

Debit: Cash
Credit: Unearned Warranty Revenue

b. Record recognize revenue in 2015:

Appliance Center will recognize the revenue from the extended warranty in the year it is earned. Since the extended warranty is for two years, the revenue recognition would be done over the two-year period. The journal entry to record this transaction in 2015 would be:

Debit: Unearned Warranty Revenue
Credit: Warranty Revenue

c. Record warranty costs in 2016:

Appliance Center will record the costs incurred to satisfy warranty claims in the year they are paid. The journal entry to record this transaction in 2016 would be:

Debit: Warranty Expense
Credit: Cash